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1. Outlook for the Global Oil Market and the Implications for Saudi Arabia

Ahmed Al-Darwish, Naif Alghaith, Alberto Behar, Tim Callen, Pragyan Deb, Amgad Hegazy, Padamja Khandelwal, Malika Pant, and Haonan Qu
Published Date:
March 2015
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Malika Pant and Alberto Behar 

A number of factors are likely to affect the global oil market in the coming years, including the strength of the global recovery, the path of oil production in the United States, and the extent of supply outages in countries experiencing conflict and political instability. Although these factors mean there is considerable uncertainty about the oil market outlook, there is potential for supply to continue to grow more quickly than demand in the coming years. In the past, Saudi Arabia has shown an ability and willingness to respond to changing conditions in the global oil market to help balance demand and supply. How it responds in the future will have important implications for the global oil market as well as for fiscal and external balances in Saudi Arabia.

Outlook for the Global Oil Market

The global oil market has been affected by competing factors over the past several years (Figure 1.1). Global oil demand has increased modestly over the past three years (by 2.5 million barrels a day or mbd), driven by demand in nonmember countries of the Organization for Economic Cooperation and Development (OECD). Substantial oil production outages in Libya and Iran have reduced output by more than 2 mbd in several quarters when compared with production levels at end-2010. At the same time, oil production in the United States has increased by more than 2 mbd since the end of 2010, output in Saudi Arabia has risen, and supply from countries such as Iraq, Kuwait, and the United Arab Emirates has increased. Overall, these developments resulted in broadly stable oil prices, which hovered within the $100–$120 a barrel range between 2011 and August 2014. Prices, however, have dropped by more than 25 percent since the beginning of September 2014 and, at the time of this writing, stand at about $75 a barrel,1 their lowest since September 2010.

Figure 1.1.Recent Developments in the Global Oil Market

1 A negative value suggests an increase in global demand and vice versa.

Sources: Bloomberg, L.P.; International Energy Agency; and IMF staff calculations.

In the near term, although demand for oil should increase given the projected pickup in the global economy, supply uncertainties remain. These include uncertainties about how the ongoing violence in Iraq will affect its future production path, and uncertainties about the situation surrounding Ukraine. Even amid deepening turmoil, Libya’s oil production recovered from June 2014 onward, but the future path of recovery in output remains uncertain given the ongoing unrest. Besides Libya and Iran, supply disruptions in Nigeria, South Sudan, and Venezuela could adversely affect oil output. Additionally, falling oil prices may hurt further investments in oil capacity in areas where the production costs are high (IEA, 2014a). Nevertheless, if U.S. production continues to exceed expectations, the political situation in Libya and Iraq stabilizes, or sanctions against Iran are eased, oil supplied to the global market could exceed expectations.

Over the medium term, the rate of increase in the supply of oil will be determined by the following factors:

  • The ongoing boom in unconventional U.S. oil. The continuing surge in light tight oil production is expected to increase total oil production in the United States, including natural gas liquids (NGLs), by 2.8 mbd by 2019 according to estimates by the International Energy Agency (IEA). The U.S. Energy Information Administration (EIA) projects relatively smaller increases in production over the medium term and light tight oil output to peak around 2018, while BP estimates tight oil production to grow quickly by 1.5 mbd between 2012 and 2015 and then to grow at a much slower pace, to reach 4.5 mbd by 2030. Estimates by the Organization of the Petroleum Exporting Countries (OPEC) are broadly in line with the EIA baseline in the medium term (see Box 1.1).
  • Other non-OPEC producers, such as Canada and Brazil, increasing their oil production. Unconventional oil from the Canadian oil sands is estimated to increase non-OPEC supply by 1.2 mbd by 2019, while Argentina and Brazil are expected to add another 1 mbd and 0.8 mbd, respectively (IEA, 2014). Altogether, the non-OPEC oil supply could increase by 6.3 mbd (including NGLs) by 2019 as a result of these developments and those in the United States (Table 1.1).
  • Increases in production capacity in some OPEC countries. Estimates are that OPEC production capacity will increase by 2.1 mbd by 2019, largely due to increases in Angola, Iraq, and the United Arab Emirates, although the uncertain situation in Iraq could reduce this. Uncertainties surround the production outlook in Iran, because of the sanctions, and also because of uncertainties about how quickly production could be increased if sanctions are eased.
  • The decisions of Saudi Arabia. IMF staff projections assume that Saudi oil exports remain broadly unchanged over the next five years, but that production (9.7 mbd in 2013) increases modestly by 0.5 mbd, reflecting growing domestic energy consumption. Saudi Arabia has traditionally maintained excess production capacity.
Table 1.1.Global Oil Demand and Supply: Medium-Term Outlook(Millions of barrel per day)
Under Baseline
Call on OPEC crude30.131.230.530.430.330.330.530.831.2
Excess supply for crude−0.20.0−
Global demand89.590.591.492.894.295.596.898.099.1
Change in inventories−
Global supply88.690.891.593.094.495.797.098.299.3
Non-OPECincludes NGLs52.653.454.756.157.358.459.460.360.9
United States8.19.110.311.412.012.612.813.013.1
Saudi Arabia9.
Under Risk Scenarios
Call on OPECUpside (Demand shock)
Upside (Demand + supply shock)231.231.532.233.033.934.8
Downside (Demand shock)30.329.829.729.629.630.0
Downside (Demand + supply shock)30.329.329.328.728.728.8
Sources: IEA (2014b); IEA Monthly Oil Report, November 2014; EIA (2014); and IMF staff estimates.

Demand shock is defined as increase/decrease in global oil consumption following a one percent increase/decrease in world GDP growth.

Supply shocks are based on the high and low resource scenarios prepared by the U.S. Energy Information Administration (EIA, 2014)

Note: NGLs = natural gas liquids.
Sources: IEA (2014b); IEA Monthly Oil Report, November 2014; EIA (2014); and IMF staff estimates.

Demand shock is defined as increase/decrease in global oil consumption following a one percent increase/decrease in world GDP growth.

Supply shocks are based on the high and low resource scenarios prepared by the U.S. Energy Information Administration (EIA, 2014)

Note: NGLs = natural gas liquids.

On the demand side, although OECD demand is likely to remain subdued, higher consumption in non-OECD countries is expected to keep global demand strong in the medium term. The projected increase in global oil demand of 7.7 mbd by 2019 is driven mainly by non-OECD demand, which is projected to increase by 19 percent or 8.6 mbd. Non-OECD demand growth in the past few years has been driven by the rapid growth in BRICS (Brazil, Russia, India, China and South Africa). Saudi oil consumption is expected to remain strong, but decelerate slightly in the medium term (IEA, 2014a). Demand growth is also projected to pick up in several other non-OECD economies, including some African economies. Demand for oil in OECD countries is expected to decline due to gradual changes in energy consumption patterns, improved energy efficiency, and incentives to switch from oil to alternative fuels due to high oil prices and increased availability of natural gas. BP’s long-term projections up to 2035 suggest further declines in OECD countries’ demand for oil, particularly in the transport sector, driven mainly by improvements in energy efficiency. Eventually, global demand for oil in the transport sector is also expected to slow after 2025 driven by similar efficiency gains and fuel switching away from oil (BP, 2014a).

Box 1.1Unconventional Tight Oil in the United States Recent Trends

Over the past few years, the United States has witnessed a sudden and rapid growth in oil and gas output due to new technical abilities to extract light tight oil through unconventional sources, reversing a long period of production decline. Light tight oil production was 2.5 mbd in 2013 and constituted 24 percent of total U.S. production of crude oil and other petroleum liquids. The emergence of unconventional oil has helped increase overall U.S. oil production by 30 percent over the past five years. Both advances in new technologies and high oil prices made it economically viable to extract tight oil. Technological advances (e.g., horizontal fracturing and drilling) have helped to unlock unconventional oil and gas from tight-rock formations including shale. And even though the cost of tight oil extraction is quite high, sustained high oil prices in the past few years made it economically viable to produce tight oil. However, if oil prices were to remain at the current level of $75 a barrel over the next few years, some of the extraction may no longer be economically viable, causing a slowdown in U.S. tight oil production. The breakeven cost of light tight oil production for 98 percent of U.S. fields was estimated to be less than $80 a barrel in 2013, but the percentage of production with breakeven prices higher than $80 a barrel is expected to rise over the medium term (IEA, 2014b), which would increase the sensitivity of tight oil production to oil prices.

U.S. Oil Production Projections, 2007–19

(Millions of barrels per day)

Source: International Energy Agency.

Medium- and Long-Term Outlook

Over time, greater knowledge and experience has permitted better estimates of technically recoverable unconventional shale oil resources. The International Energy Agency (IEA) estimates U.S. tight oil production to increase by another 2.5 mbd to 5 mbd over the medium term. The projected trends by the Organization of the Petroleum Exporting Countries (OPEC) are broadly in line with projections by the IEA and the U.S. Energy Information Administration (EIA) in the medium term, and light tight oil supply in the United States and Canada is expected to peak around 2017–19 at 4.8 mbd, 1 and then decline gradually to 2.7 mbd by 2035, which is in line with the EIA low resource scenario. The longer-term outlook by the EIA suggests that U.S. tight oil production is likely to plateau around 2018 at 4.8 mbd before declining in the long term, while BP projects it to continue to grow and exceed 4.5 mbd by 2030 (BP, 2014b). These differences across forecasters mainly reflect a variety of uncertainties related to both technology and policy.

U.S. Tight Oil Production Projections

(Millions of barrels per day)

Sources: BP; Energy Information Administration (EIA); International Energy Administration (IEA); and IMF staff estimates.

Impact on the Global Oil Market

One of the estimates by the EIA suggests that recoverable resources in the United States amount to 33 billion barrels (EIA, 2013). The increase in U.S. production has reduced its dependence on imported oil and has substantially improved the U.S. energy trade balances by reducing its net imports of crude oil and related liquids by almost 50 percent (EIA, 2013). Since U.S. tight oil is of a light and sweet variety, the ripple effects of its production growth have been unevenly distributed. Exporters of light grades, such as Algeria and Nigeria, have seen their exports to the United States fall by 60–80 percent over the past five years. The producers of heavier sour grades have done much better given the technical specifications of U.S. refineries; for example, Saudi Arabia’s exports to the United States have remained broadly stable since 2010 (Saudi Aramco also owns stakes in several U.S. refineries). The unconventional oil boom is also causing an unanticipated shift in the mix of crude oil grades—exacerbating pressures on the global refining industry—although refiners in the Middle East are better positioned to manage this trend than some of their peers.

Oil demand is also likely to be affected by the boom in shale gas, with the use of gas becoming an important source of primary energy in many sectors. Besides the United States, countries like Argentina, China, and Mexico have focused on pursuing unconventional natural gas rather than oil due to different geology, water availability, and infrastructure. Among various sectors consuming oil, switching from oil to gas has picked up the most in the increasingly efficient transport industry, which is the largest consumer of oil.

Unconventional Oil Boom Outside the United States

Canadian oil sands account for half of the Canadian liquids production, and production is projected to average 3 mbd by 2019 (IEA, 2014b). BP estimates that tight oil will slowly expand in other countries and account for 7 percent of global supply, while Canadian oil sands are estimated to reach a market share of 5 percent by 2035. The IEA projects that the tight oil supply outside of the United States could reach 0.7 mbd from Argentina, Canada, and Russia, while Australia and Mexico are also expected to start producing marginal amounts of tight oil by 2019.

In sum, the expansion of unconventional oil production will continue, but is subject to uncertainties relating to technology and policy. The economic viability of production will depend on the future trends in oil prices. If oil prices remain around current levels of $75 a barrel, this may lead to some downward revisions in the medium-term outlook for unconventional oil supply.

1 See OPEC (2013) and IEF (2014).

Putting the demand and supply outlooks together suggests that the oil market will be oversupplied, although there are considerable uncertainties. The medium-term outlook for the global oil market, anchored on the latest available IEA forecast, suggests that supply could continue to exceed demand, assuming only marginal inventory accumulation in the forecast period (Table 1.1). Despite a 7.7 mbd increase in global demand by 2019, high non-OPEC oil supply (6.3 mbd by 2019) would imply that the demand for oil from OPEC would remain broadly unchanged for the next few years and increase only marginally to 31.2 mbd by 2019 (versus 30.5 mbd in 2013). This implies that the baseline projection for the OPEC crude oil supply (32.7 mbd in 2019) would be much higher over the medium term and more than the demand by 1.4 mbd in 2018 and 2019. This outlook could sustain the downward pressure on oil prices unless production adjusts to partially reduce the excess supply. The price downside, however, would be limited by the high breakeven cost of the unconventional oil producers.

Projections for the demand and supply of oil are subject to considerable uncertainty. With regard to U.S. oil production, uncertainties regarding the actual level of resources available, evolution of technologies, and the associated cost to recover them are captured by the high and low oil resource cases developed by the EIA.2 The update from the EIA in May 2014 raised the base case for U.S. oil production in line with the EIA’s previous upside scenario following the substantial increase in U.S. tight oil production in 2013. This update illustrates the ongoing uncertainties surrounding the outlook for U.S. oil production over the medium term. Also, the uncertainties seen in other key oil-producing countries in recent years may continue, restricting the increase in supply. On the demand side, weaker growth in China, not only through the direct impact of lower demand for oil from China but also from the cascading effect of spillovers of slower Chinese growth, could affect demand for oil in other economies.

The wide range of uncertainties regarding the outlook for the demand and supply of oil over the medium term could affect the call on OPEC. To illustrate the range of uncertainties around the call on OPEC, the impact of different global oil demand and non-OPEC supply outcomes are considered (Figure 1.2). The demand-side risk to the baseline is defined as the change in global oil consumption from a 1 percent shock (both positive and negative) to world GDP growth, assuming no change in income elasticities. On the supply side, uncertainties around non-OPEC oil supply are based on the above-mentioned high and low resource scenarios for U.S. oil production from the EIA. If the combined downside risk scenario of higher non-OPEC supply and lower global demand compared to the baseline were to materialize, demand for OPEC oil would be much lower than the OPEC production in the baseline. The estimated excess supply over demand would be about 3.9 mbd (versus 1.4 mbd in the baseline). On the other hand, the combined upside risk would result in excess demand over supply of about 2.1 mbd by 2019. This may require Saudi Arabia to use its spare capacity to produce more to meet demand (Saudi Arabia’s spare capacity is about 2.7 mbd).

Figure 1.2.Call on OPEC: Uncertainties around the Medium-Term Outlook

(Millions of barrels per day)

Source: IMF staff calculations.

Additionally, if the ongoing unrest in some OPEC countries affects their production, excess supply could be lower than the baseline. The baseline assumes that production in Iraq would increase in line with its production capacity, while Libya would continue to produce slightly above the 2014 level over the medium term. If instead production in Iraq and Libya were to remain unchanged over the medium term at their current production levels (reported at 3.3 mbd and 0.7 mbd, respectively, in the November 2014 IEA monthly oil market report), excess supply in the baseline would be reduced to around 0.4 mbd (from 1.4 mbd).

Saudi Arabia’s Role in the Global Oil Market

Saudi Arabia is a key player in the global oil market, accounting for more than 16 percent of global proven reserves. The country and has been able to scale up its production quickly because of its high spare capacity of more than 2.7 million barrels a day, which accounts for more than half of global spare capacity (Table 1.2).3 This enables Saudi Arabia to play a key role in the global oil market and contribute positively to global economic stability and growth.

Table 1.2.Saudi Arabia’s Role in the Global Oil Market


Average Spare


Reserves (2013)
Billons of barrelsMillion


Percent of

world total
Saudi Arabia82.02.7265.915.8
United States63.544.22.6
United Kingdom16.93.00.2
Sources: BP(2014a); International Energy Agency; and IMF staff calculations.
Sources: BP(2014a); International Energy Agency; and IMF staff calculations.

In the face of supply interruptions in other countries or demand surges, Saudi Arabia has responded by increasing its production to help balance demand and supply in the oil market (Figure 1.3). For example, during the first Gulf War (1990–91), the Venezuelan strike and the second Gulf War (2002–03), Hurricane Katrina in 2005, the surge in China’s demand in 2004, and the Libyan crisis (2010–11), Saudi Arabia increased its production to ensure that demand for oil was met in the face of declining supply from other sources (IMF, 2013b). Similarly, at times of weak or declining global oil demand or supply recovery, such as the U.S. recession in the early 2000s and the global financial crisis (2008–10), Saudi Arabia scaled back its production in response to market conditions (by 1.6 mbd and 1.4 mbd, respectively, in these periods).

Figure 1.3.Monthly Crude Oil Production, 1990–October 2014

Sources: JODI database, Bloomberg; and IMF staff calculations.

In the recent past, Saudi Arabia has continued to help balance the global oil market. It raised its oil production in the first half of 2012 as sanctions on Iran were tightened, but then scaled back production in the second half of 2012 as output in Iraq, Libya, and the United States increased. It then increased production again in the second half of 2013 as Libyan production fell. However, the rapid increase in U.S. oil production since late 2012 resulted in less of an increase in production by Saudi Arabia to meet supply shortfalls elsewhere than during 2011. According to the most recent months available (up to October 2014), Saudi production has remained broadly unchanged despite the drop in oil prices.

A strong starting fiscal position has helped Saudi Arabia manage periods of lower oil production (Figure 1.4). The periods when oil production was reduced occurred at times when the budget was in substantial surplus in the year before the cutback.

Figure 1.4.Change in Saudi Arabian Oil Production

(Millions of barrels per day)

Sources: JODI database; Bloomberg; and IMF staff calculations.

Potential Implications of Global Oil Market Developments for Saudi Arabia

The uncertain medium-term outlook for the oil market could have implications for Saudi Arabia. The baseline scenario suggests that the supply of oil could exceed demand by up to 1.4 mbd. If OPEC supply does not respond, then oil prices would likely fall. The upside and downside scenarios suggest that there are considerable uncertainties around the outlook.

How Saudi Arabia chooses to respond to future demand and supply trends will be important for the dynamics in the oil market. Three illustrative cases are considered for how Saudi Arabia responds (no adjustment, adjustment by half, and full adjustment) under three different assumptions about the price elasticity of demand for oil (−0.2, −0.1, and −0.05).4 The impact of different responses under the baseline, downside, and upside scenarios in 2015 on the fiscal balance in Saudi Arabia is shown in Table 1.3.

Table 1.3.Impact of Different Oil Market Scenarios on Saudi Arabia in 2015
Baseline ScenarioDownside ScenarioUpside Scenario
Change in oil production (in mbd)
No adjustment0.00.00.0
Full adjustment−0.6−1.60.6
Adjustment by half−0.3−0.80.3
Price Elasticity of Demand1−0.2−0.1−0.05−0.2−0.1−0.05−0.2−0.1−0.05
Impact on oil price (percent change)
No adjustment−3−6−12−8−17−333612
Full adjustment000000000
Adjustment by half−2−3−6−4−8−17236
Impact on oil revenue (percent change)
No adjustment−3−6−12−8−17−343612
Full adjustment−7−7−7−19−19−19777
Adjustment by half−5−6−9−13−17−255710
Impact on fiscal balance (in percent of GDP)
No adjustment−1−2−4−3−6−11124
Full adjustment−2−2−2−6−6−6222
Adjustment by half−2−2−3−4−6−8223

Assuming no supply reaction, price elasticity of demand of −0.05, −0.1 and −0.2 implies that a 1 percent increase in oil supply would lead to fall in oil prices by 20 percent, 10 percent and 5 percent, respectively.

Sources: International Energy Agency; Energy Information Administration; and IMF staff estimates.

Assuming no supply reaction, price elasticity of demand of −0.05, −0.1 and −0.2 implies that a 1 percent increase in oil supply would lead to fall in oil prices by 20 percent, 10 percent and 5 percent, respectively.

Sources: International Energy Agency; Energy Information Administration; and IMF staff estimates.

The full adjustment response assumes that Saudi Arabia will cut its own production in 2015 to absorb all the excess supply of 0.6 mbd under the baseline. Consequently, there is no impact on prices. As a result, the fiscal balance would deteriorate by 2 percent of GDP in 2015 (Figure 1.5).

Figure 1.5.Impact on Saudi Fiscal Balance in 2015 under the Baseline Scenario

(Percent of GDP change from baseline)

Source: IMF staff calculations.

The no adjustment response assumes that Saudi Arabia does not adjust its production and continues to produce the amount assumed in the baseline and as a consequence oil prices fall. Since output remains unchanged, the impact on revenues reflects the price effect alone, and differs significantly depending on the choice of the estimate of the price elasticity of demand. If a higher estimate of demand elasticity of −0.2 is used, then oil prices would need to fall by less to balance demand and supply (by 3 percent) and the fiscal balance would fall by 1 percent of GDP. However, if a smaller estimate of the demand elasticity of −0.05 is assumed, then oil prices would fall more substantially by 12 percent. Consequently, the fiscal balance would drop by 4 percent of GDP from the baseline in 2015. However, the extent of the fall in oil prices could be limited by the high breakeven cost of shale oil production, which could provide an effective floor for oil prices.

The adjustment by half response, under which Saudi Arabia cuts back production by half of that needed and prices partially adjust, falls in between the above two scenarios in terms of the impact on fiscal revenues.

The impact on fiscal balances is larger under the downside scenario compared to the baseline, but the fiscal balance could also improve if the upside risks materialize (Table 1.3). With a higher excess supply of 1.6 mbd in 2015, the impact on the fiscal balances under the downside scenario would be much larger for each of the three sets of price elasticities. On the other hand, the upside scenario suggests an excess demand of 0.6 mbd, which if met fully by Saudi Arabia, would improve its fiscal balance by 2 percent of GDP. Thus, the wide range of uncertainties in the global oil market would impact Saudi’s oil revenue through changes in both the level of oil production and prices.


There are considerable uncertainties surrounding the outlook for the oil market. Demand for oil is set to increase, driven by strong growth in emerging markets, but supply increases from the United States and other countries have also surprised on the upside. However, the economic viability of unconventional oil production will depend on the future trend in oil prices. If oil prices remain at current levels, this could result in downward revisions in the medium-term outlook for unconventional oil supply. This creates further uncertainty regarding the outlook for U.S. production, which will depend on oil prices and technological and policy developments. Other uncertainties are also considerable, including from the global growth outlook, and the political situations in a number of key oil-producing countries. Indeed, there have been many negative supply shocks in the recent history of the global oil market. On balance, however, it appears that oil supply will continue to exceed demand in the coming years, sustaining the downward pressure on oil prices. Saudi Arabia has adjusted production several times in the past to balance the market. How Saudi Arabia responds in the future will have important implications for the global oil market and for Saudi Arabia’s own fiscal and external balances.


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